A common myth among people with an ARM (Adjustable Rate Mortgage) is that they can switch to a fixed rate mortgage when they see interest rates headed up. This is like waiting to put on your seat belt before a traffic accident. By the time you react, it is too late. Remember that interest rates float down and jump up.
When looking at your ARM mortgage you should consider how long the current rate will last. It might last for years or it might reset every month. You need to examine your mortgage documents to know. Factors to consider when analyzing your mortgage are: the index, margin, adjustment period, and caps. Your interest rate will consist of the index plus the margin. Common indexes are COFI (Cost of Funds Index), LIBOR (London Interbank Offered Rate), 1 year CMT (Constant Maturity Treasury), etc. Margins can vary widely and must be analyzed individually.
ARM’s always have “caps” that specify how much the loan can change in a given time period and over the life of the loan. One ARM mortgage might have caps that limit the rate increase to 1% a year and 6% over the life of the loan, while another could change monthly with a ceiling interest rate of 14%. The fact that your neighbor’s ARM went up or down does not mean your mortgage will change the same way.
Feel free to call or email me with any questions or current rate quotes.
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